Another steel company, SAIL has reported grim June quarter earnings. The company's net sales declined by 9% and operating margins dropped by huge 600 basis points due to poor realisations.
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The only positive was a 10% decline in interest cost. In FY01, SAIL has repaid high cost debt (15% - 17%) amounting to Rs 26 bn. It has repaid further Rs 5.4 bn during the first quarter. The company raised fresh resources from the market to refinance a part of their high cost debt. Nevertheless, the company's borrowings are reduced to below Rs 142 bn as on June '01. SAIL's debt peaked up to a level of Rs 210 bn in FY99.
The company's inventory was also lower by 12% in the June quarter. However, an increase of 3% in staff cost and 14% jump in power cost, dragged down the operating margins.
SAIL has decided to produce and market several high-grade special steel products, which will constitute 25% of its saleable steel basket, as part of its revenue maximising strategy. These value added products are expected to bring additional remunerative earnings compared to low realisations from the base grade. The new range of value-added products are being developed by leveraging its Rs 120 bn modernisation programme technology.
The company has decided to invest over Rs 10 bn in the current year in various projects, which include its four integrated steel plants. This is the lowest capex amount in the last three years. SAIL is aiming to curtail its losses to Rs 1.5 bn in FY02, from the very high loss of Rs 7 bn in FY01 (cash profit of Rs 4 bn in FY01). It is also targeting to turn into black in the next fiscal year. Among the integrated plants, Bokaro and Bhilai have been making profits while the Durgapur steel plant has earned cash profit in FY01. The Rourkela steel plant, which has been constrained by limited orders, has improved its quality of products including hot rolled coils.
The stock currently trades at a cash P/E of 5x FY01 earnings. If the company is successful in changing the product mix in favour of value added products, it will be able to achieve its profit target. Valuations of the stock depends on its ability to restructure the debt and meet the profit target.
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